A lackluster April for Freddie Mac

April saw a sharp drop in Freddie Mac's retained portfolio - for the sixth consecutive month - and a decrease in the GSE's guarantee business relative to March, Freddie Mac reported in its volume summary for last month. The interest rate risk measures remained decent despite the strong rise in interest rates, analysts noted.

Freddie's retained portfolio dropped at a 7.8% annualized rate to $631.5 billion due to higher liquidations and sales. The annualized liquidation rate increased to 42% in April from 34% in March. The increase was attributed to a surge in refinancings over the month. These were somewhat offset by a rise in new purchases. New commitments remained steady at $20.3 billion. The company's total mortgage portfolio contracted at an annualized rate of 2% to $1.43 trillion.

JPMorgan Securities equity analysts said that there might be some temporary improvement in retained portfolio growth in May caused by the wider MBS-to-debt spreads at the beginning of the month. However, in the longer term, this is still hindered by stable MBS bank holdings. Banks will probably not sell as much of their securities portfolios in the near term since most portfolios have unrealized losses.

The key factor to bank selling is probably going to be a flatter yield curve, said analysts. Prudential Equity Group stated that, with a flatter yield curve and economic improvement, banks are expected to originate more C&I loans and to sell more mortgage loans. Meanwhile, Freddie is purchasing a fair amount of short duration product like ARMs.

Freddie's retained commitments dropped in the month to $20.3 billion from $20.6 billion in March. "We expect these to decline further as the refinance "boomlet" has eased sharply over the last several seeks," said analysts from Raymond James & Associates. "At some point we expect portfolio growth to resume, but, at this time, mortgage demand by other investors doesn't seem to have weakened enough for Freddie to profitably grow its portfolio."

In terms of Freddie's guarantee business, the numbers dropped at a 4.9% annualized rate to $1.17 trillion. This is largely because of a rise in the liquidation rate to 44% annualized in April from 36% in March.

JPMorgan said that liquidations have been a problem for Freddie every time interest rates have declined in the last few years. These liquidations have stayed above Fannie Mae's liquidations - which are at 36% - in spite of Freddie offering favorable guarantee fees to lenders in order to slow liquidation activity.

Interest rate risk stayed very low despite the rising rates in April. The GSE's duration remained at zero months, which is flat relative to March.

According to Prudential, Freddie's interest rate risk disclosures reveal the market-value sensitivity of their equity to changes in interest rates.

"Overall, Freddie's rate sensitivity position appears to be benign, despite the fact that the measures are subject to change post-restatement," wrote analysts from Prudential.

Freddie hedges 65% to 70% of convexity risk at the time of purchase. Aside from this strategy, the firm is constantly rebalancing its portfolio to manage interest rate risk as well as changes in the environment.

Under volatile markets with large rate moves, the GSE only has to adjust its rebalancing against the 30% to 35% of unhedged risk

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